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Why This Oil Price Rally Has A Limit

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“Perfect Storm” Drives Oil Prices Higher

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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Pauses At $50 Ahead Of OPEC Meeting

One hundred and fifty-seven years after Big Ben was started, and the oil market is counting down the clock to an onslaught of economic data from the ringing in of a new month, as well as the OPEC meeting on Thursday. With a feast of fun crammed into a shortened week, here are five things to consider in oil markets today:

1) We discussed last week how average fuel efficiency is stalling out in the U.S., encouraged by low gasoline prices. This is a trend being seen across the globe; monthly SUVs sales in China continue to rise ~50 percent year-on-year, while in Europe SUVs outsold all other types of passenger vehicles last year.

In the U.S., the share of light trucks, vans and SUVs has risen from as low as 43 percent in 2008 (think: $100 oil) to 60 percent now. As this share rises, and as low gasoline prices encourage people to drive more, gasoline demand this year is expected to reach a new record high, surpassing the record set in 2007. Related: Oil Heading for $60

(Click to enlarge)

2) On the economic data front, we have had a smattering of releases out of Japan in recent days; household spending was better than expected, as was retail sales and preliminary industrial production. French Q1 GDP out yesterday was better than expected at +0.6 percent QoQ, while German retail sales today fell -0.9 percent in April versus the month prior.

In good news, Germany’s unemployment rate dropped to a record low of 6.1 percent. For the Eurozone on the whole, the unemployment rate remained at 10.2 percent, while preliminary inflation data for May (YoY) show it trudging through deflationary terrain – as it has done since January.

3) In terms of emerging markets, two data points starkly highlight the divergence of emerging economies across the globe. The Brazilian unemployment rate reached a new 12-year high at +11.2 percent as its economy remains derailed, while Q4 GDP for India underscored how robust its economy is, growing at 7.9 percent. This was much higher than consensus of 7.5 percent, and at its quickest pace of growth since Q3 2010.

While the resource-rich economy of Brazil has been crushed by the drop in commodity prices since mid-2014, India’s economy has arguably experienced a huge benefit, given its status as growing consumer and importer.

India GDP, percent YoY (source: investing.com)

4) Onto the U.S., and consumer spending increased by 1 percent in April versus the month prior – better than expected, and at the fastest pace in nearly seven years. Given consumer spending accounts for ~70 percent of U.S. economic output, a positive print here adds more fuel to the Fed’s fire for an interest rate hike this month. Inflation data, via the PCE index, showed firming for inflation in April of +0.3 percent MoM – the strongest reading since May last year (pssst….rising oil prices). Related: When Will Solar Overtake Oil?

5) Finally, the Chinese port of Qingdao is very much in the news at the moment, given teapot refiners have been pulling crude imports into the port at a rapid pace in recent months. While an article in the Wall Street Journal today highlights how 27 smaller ‘teapot’ refiners have an import license or are waiting to be approved for one, the EIA highlights how diesel exports have rapidly increased, as there is not enough domestic demand to mop up all the extra product being refined.

While PetroChina and Sinopec account for nearly three-quarters of China’s total refining capacity, the rise of teapots in the Shandong region since mid-last year is driving on imports into the northwestern province. Our ClipperData show that crude imports into Qingdao have risen strongly in recent months, accounting for well over 15 percent of total waterborne crude imports:

(Click to enlarge)

By Matt Smith

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